It can be difficult to compare these two options effectively -
the second rate (umbrella or LTD) is always higher, but how much
higher does it work out to be in the end?
When deciding whether to use an umbrella company or work through your own limited company, it's worth the effort to consider the impact of IR35. If you fall within IR35, it is usually more cost-effective to work with an umbrella company, and depending on the fees charged by the umbrella, you may even prefer being an agency PAYE employee. Most new to the market contractors are not yet familiar with the responsibilities or processes involved in running their own limited company which effectively removes this option, at least for the first assignment. So it boils down to a choice of two - agency PAYE or umbrella company.
Working PAYE at the agency is certainly the most convenient, but you may want to consider whether an umbrella company will offer a higher take home salary. The added pay can be significant, particularly over the long term, and you have the option to switch umbrella companies at any time... or even move to using your own limited company once you're more familiar with the contracting game.
Being an employee of the agency is not a particularly popular option, for contractors or recruiters. Agency PAYE positions don't normally offer you the ability to offset business expenses against your taxable pay. Umbrella companies do, provided of course you have in fact incurred the expenses being claimed and can prove them with original receipts.
Umbrella companies have earned a reputation for not being
particularly tax advantageous when compared to running your own
limited company, and to a certain extent this is true. But when you
throw IR35 into the mix, this criticism is largely inaccurate. Most
umbrella companies are almost as cost effective as running your own
limited company on an 'inside IR35' basis, and generally involve a
lot less management and oversight on your part - freeing up your
In the end, the most important factor to consider when weighing up the two pay rates proposed by your agency is whether or not the second (or inflated) rate adequately covers the employer's national insurance contributions, holiday / sick pay and payroll administration cost that a recruiter will save by NOT employing you on their books. To put that another way, will you better or worse off once YOU have effectively paid these things by working through an umbrella company or LTD?
Trying to accurately quantify this cost is difficult, and when
you attempt to break it down further into a daily or hourly rate it
really does start to get complicated. Some use a crude £1 uplift
per hour regardless of the original rate, others prefer a simple
10% uplift from PAYE to umbrella / LTD.
Whatever the increase, just make sure you do your own research and perhaps ask someone suitably qualified to perform the calculation for you. New contractors are often baffled by the option of two different pay rates and almost always go with the higher without due consideration of whether the higher will in fact pay more after tax.